Biotechnology: "A Terrible Panic" among Private Biotechs

As IPO funds and deals with big pharma dry up, lots of small fry could fail

Variagenics Inc. (VGNX ) should have been a success. The Cambridge (Mass.) startup had a hot new technology: harnessing genetic variations to speed drug development. It went public in the biotech boom year of 2000. But since then, the stock has swooned from more than $28 to $1.40. In mid-November, the company was acquired by another biotech, Hyseq Inc., for just $55.9 million in stock--less than Variagenics' $60.8 million in cash and marketable securities at the end of the third quarter. To survive, the combined company will cut its staff nearly in half.

Sadly for Variagenics, it got caught in 2002's severe biotech downdraft. "We are coming off one of the most difficult years the industry has ever had," says Dennis J. Purcell, senior managing partner at the Perseus-Soros BioPharmaceutical Fund.

While big names, such as Amgen Inc. (AMGN ), have weathered the storm, virtually everyone else is hurting. The stocks of hundreds of biotechs are trading for less than $5 per share--many below their cash value, says Purcell. And with the IPO market virtually dead and no upturn in sight, "venture capitalists are terrified that their companies can't go public," says one CEO. "There is a terrible panic."

VCs say that the average private company has only 10 months of cash left. So they are downgrading their portfolios and anteing up more money. "The market is terrible, and it's very difficult to find companies with valuations that make sense," says Dr. Jean-François Formela, general partner of Atlas Venture.

Hardest hit are those outfits that offer technologies instead of new drugs. A wary Big Pharma has been doing only modest pilot deals with these firms, causing many to refocus on developing their own products. But that can be a tough road, too, because the financing crisis makes it hard for small biotechs to afford clinical trials. Without proof that the drugs work, major drugmakers won't buy. Plus, early clinical results from many biotech companies have been disappointing. In the next year or so, "lots and lots of companies are going to die," predicts Alan G. Walton of Oxford General Partners.

The gloom won't last forever. Given big leaps in science, no one doubts that blockbuster drugs are on the horizon. By 2004, the bloom may be back on the biotech rose.

By John Carey in Washington

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